Common Advertising Mistakes, Lending Edition

Last week, I discussed the common mistakes we see in deposit advertisements. Today, I would like to discuss some of the more common mistakes we see in lending ads.

If you state a rate on a consumer loan, it must be an annual percentage rate or an APR. In an ad for a closed-end consumer loan, you may also state a simple interest rate in conjunction with the APR. We often see financial institutions wanting to highlight a low interest rate and they will only state the simple interest rate without including the APR. If the APR my increase after consummation, you must state that fact. We often see ads for ARMs that do not include a statement that the APR may increase; they will simply state that the loan is an "ARM." Not every consumer understands that an ARM is an adjustable rate mortgage and that the rate may increase after consummation.

If an ad for a closed-end consumer loan secured by a dwelling discloses a simple interest rate and more than one rate will apply to the loan, the ad must state each rate that will apply, the time period that each rate will apply, and the composite APR. We often see ads that state the low introductory rate but do not state the fully indexed rate. When an ARM has an introductory rate, e.g. an initial interest rate that is not determined by the index or formula that is used to make later interest rate adjustments, the APR will be a composite APR that is calculated using the introductory rate for the period it will apply and the fully-indexed rate for the remainder of the term. We often see ads that state an APR that was determined using only the introductory rate.

If an ad for a closed-end consumer loan includes a payment amount and that payment amount does not include taxes and insurance, the ad must state the fact that the payment amount does not include taxes and insurance and that the actual payment obligation will be higher. This statement must be in close proximity to and in equal prominence with the payment amount. Many ads will include the statement that the payment does not include taxes and interest, but will then state that the actual payment obligation "may" be greater. Because the consumer is legally obligated to pay taxes, even where an escrow is not required, the payment obligation WILL be higher. The payment example is often in the body of the ad and the statement about taxes and insurance is often in the footnotes. Close proximity is immediately above, below, before, or after the payment example with no intervening text and equal prominence means in the same size and style font.

On ads for HELOCs, the biggest issues we see is with promotional interest rates. A promotional rate is a rate that is not based on the index and margin used to make later rate adjustments in a variable-rate plan that is lower than a reasonably current annual percentage rate that would be in effect under the index and margin that will be used to make rate adjustments. If a promotional rate is stated, the ad must also state the period of time the promotional rate will be in effect and any APR that may apply. This must be stated with equal prominence and in close proximity to each listing of the promotional rate. We often see ads that will state the promotional rate and then an "as low as" thereafter rate, but the regulation requires that you state ANY APR that may apply, including the maximum APR that could apply. We often will see the promotional rate in the body of the ad while the time promotional rate will be in effect and the other APRs that may apply will be stated in the footnotes. Again, this must be immediately above, below, before, or after the payment example with no intervening text and in the same size and style font.

Another issue we often see is the incorrect use of the Equal Housing Lender logo. We are starting to see many ads that have the EHL logo with the words next to, rather than below, the house. If you are a savings association or a farm credit institution, you must include the Equal Housing Lender logo with the words under the house. For all other institutions, we strongly encourage you to use the logo as is was designed and intended to be shown, we have not heard of any institutions being written up for using the logo with the words to the side, but why take that risk?